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Starting a Small Business – Crowdfunding


Quickly, Congress passed the JOBS Act this year with a provision allowing companies to solicit investments from “unsophisticated” investors.  Previously, solicitations could only be made to high net worth investors.  The provisions were to become effective on January 1, 2013 pending rules to be written by the SEC.

The SEC has not written the rules yet and probably won’t by January 1.  (I don’t know if that is a permanent link.)  This delays everyone and everything related to crowdfunding.  DISCLOSURE – I plan both selling crowdfunded investments and providing consulting to businesses wanting crowdfunding.  I believe it will help boost the economy.

PROS:  Small businesses requiring up to $1,000,000 in capital will have a new source for funds.  Owners can cash out of companies without having to sell their entire interest.  Ordinary investors can find new revenue streams and investment opportunities.

CONS:  There will probably be a lot of con-men involved in crowdfunding.  Most business ventures fail and ordinary investors may not be able to handle the failure and loss of investment.  Congress will probably overturn the law once some crying Grandma appears on 60 Minutes with a sob story about losing her life savings.

Obviously, I’m in support of the law.  I signed a petition here in support of it.  I live in a depressed area that could use a capital infusion.  I’m sure there are plenty of local businesses that would get a boost from crowdfunding.  There are also plenty of local investors looking for a better rate of return than CDs and Money Market accounts.  There will be plenty of hucksters (see .com bust and real estate bust).  More importantly, there are plenty of good businesses and good business ideas that will benefit from this law.

 

Right to Work for Starting a Small Business


This is not a political post.  As I’ve said before, unions are great, as long as you already have a job.  The recent change in Michigan to a right to work state will not hurt the private sector unions in the short-term and may help them in the long-term.  This is a decent description of right to work.  Basically, the law means that you don’t have to join a union to be eligible for a job.  Michigan’s economy could use a boost.  See ratings here.  They also have one of the highest unemployment rates in the country (right behind my beloved CT.)

Right to work protection will help Michigan attract more business investment.  Unions are one more hassle for a business to consider when choosing a location.  My personal experience with unions is mixed.  Some unions understand the need for flexibility while others shoot themselves in the foot, thigh and waist by being inflexible.  But, in general, capital tends to flow to businesses that aren’t unionized.    This means that investors will view Michigan’s business climate as more friendly.  Companies involved in the auto industry may consider relocating closer to their customers in Michigan.  Business may also move out of non-right to work states like Illinois and Ohio and into Michigan.  Indiana and Wisconsin have had some success in poaching businesses from Illinois.

Increased business in Michigan will be good for both union and non-union employees.  Union shops can stay union and continue to collectively bargain for wages, benefits, work rules, etc.  Non-union shops can start or expand without the threat of the additional time and expense of negotiating with unions.

The result will be measured by a decrease in the unemployment rate in Michigan and increase in its’ GDP.  As the law is effective on April 1, 2003, it may take until Spring 2015 to demonstrate any success or failure.

 

 

Starting a small business – Income Tax


I hate paying taxes.  I hate when my clients have to pay taxes.  I hate when my clients say, “I’m happy that I make enough money to have to pay taxes.”  You really shouldn’t be.  Imagine what you could do with the money if you didn’t have to pay it – give to charity, invest in your business, invest in anything, save for your kids, pass it on to your kids, etc.

If you own a business and it’s profitable, you will have to pay Federal, State and maybe local income taxes on the profit.  There is no way around it.  If you don’t, the government will find out and they will come after you.  There are basically three ways to report and pay income taxes on business income:

  1. as a corporation;
  2. as a pass-thru entity, and;
  3. as an individual.

The method depends on the legal and tax structure of your business.  The rates may be higher or lower for a corporation than the other two methods.  A pass-thru entity is a business that does pay the income tax.  Instead, it passes the income thru to your individual tax return and you pay taxes at the individual rates.

Pass-thru entities include partnerships and S corporations.  Your business is automatically a partnership if there is more than one owner.  S Corporation status is an election that your business makes.  It can be made for qualifying regular corporations, partnerships and single person LLCs.  A Limited Liability Company is a legal entity designed to give corporate legal protections to non-corporate entities.  My business is organized as a single person LLC.  LLC really has nothing to do with taxes unless you elect to be taxed as a C Corporation or S Corporation.

If your business is a C Corporation, the profits are taxes at the corporate level.  The corporation files a tax return and pays any tax due.  The owners do not include the corporate profits on their Form 1040.  They would only need to report dividend income if the corporation paid dividends.

If you are the sole owner of your business, you will report your revenue and expenses on Schedule C of your Form 1040.  The earnings are taxed at individual rates.  You are required to pay estimated taxes on a quarterly basis towards your income taxes from your business.

Selection of a tax entity usually makes sense once your business is profitable with annual net income over $40,000 or you have employees.  Otherwise, for the sake of simplicity, it is probably best to use the default tax entity based on your legal structure.

 

Starting a small business – Social Entrepreneur


“I want to make the world a better place.”  “I only buy Fair Trade products.”  “I want to contribute X amount of my profits to XYZ charity.”  I am a newbie to these kinds of businesses.  As a misanthropic curmudgeon, I try to maintain an open, however skeptical, mind to these business models.

If you’re interested in this business model, check out lifeoutofthebox.  This is a young couple in Nicaragua selling handmade goods and suing some of their profits to supports schools in the country.  They are very passionate about their mission and I wish them the best.  I’m hoping that they start selling belts soon.

Listen, businesses run on capital (which can be synonymous with cash).  No capital means out of business.  I like to believe that every business, in its own way, is trying to make the world a better place.  But you MUST make a profit to stay in business (or you’re just a private foundation giving all your money away). Profit is just an addition to capital measured over time – like a space time continuum.  Profits are not bad or evil.  They are only a measure of success for your business.

Businesses must be run in perpetuity and you must plan for that perpetuity.  Just because you had a profit in March doesn’t mean you’ll have a profit in April or ever again.  That’s why profits are important.  They guarantee the continuity of your enterprise.

At some point, I’ll do a post on not-for-profits and how they are generally a bad idea.  I believe it is far better to generate a profit through hard work and then freely give that profit, or a portion of it, to a charity.  I’ll call this the Carnegie method.  So, by all means create your social entrepreneurship but run it like a business and plan on making a profit.  Add a line for charity in your budget and hold yourself to it.  Or, amass as much wealth as possible and give it all away like Andrew Carnegie did.

 

 

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Starting a small business – Marijuana


A few more states legalized possession of marijuana.  Check out this map – I can’t verify the information.  But it looks like legalization is gaining momentum.  Does this mean that you could start a marijuana business?

Farming sucks.  You need arable land, water, seed, fertilization, a strong back, hanging barns and security.  (I’m basing this on local knowledge of tobacco farms.)  You need to know what you’re doing and do it everyday.  Once, you grow it, how would you distribute it – straight to consumers, through dispensaries, etc?  Farming sucks – 20 hours a day of work and you can’t tell anyone about it.

Manufacture supplies and peripherals?  Do you know anything about making paper, blowing glass or making pottery?  It might not be enough to make a profitable go.  You’ll find too much competition on paper unless you can make organic, bleach free, etc paper.  How will you distribute the products?  Potentially, you could start a web based store for peripherals but you’ll find lots of competition.

Regulation will eventually kill you.  Shortly after legalization will come regulation.  (If it makes money, tax it.  If it keeps making money, regulate it.)  We have a huge, permanent bureaucracy in this country that is always looking to expand.  Do you think the FDA and ATFE and related agencies won’t get involved?  Do you want to compete against Pfizer or Monsanto (probably not)?

How about downstream?  Could there be pot specific munchies that you can make and distribute, especially with Hostess’ demise.  How about providing a safe place for people to consume their product?  You could teach how-to classes for wannabes and newbies.

I don’t see it as a winner unless you find a niche.  As it becomes more mainstream, the Big Boys will enter and crush you.  Good luck.

 

Strategy for innovation – Society and Culture – AEI


Strategy for innovation – Society and Culture – AEI.

I think this is all crap.  Innovation shouldn’t be affected by government.  While I agree that government should get out of the way, I believe that innovation needs more private capital.

Let’s go outside the box.  Let’s introduce a 3% annual wealth tax on all accumulated wealth over $10 million.  At the same time introduce a new R&D wealth tax credit that offsets the new wealth tax dollar for dollar with each dollar invested in R&D, software development excluded.

Private capital has been misallocated for decades now.  Job growth and real GDP growth will depend on actual, tangible production.

 

Free Business Plan Review Offer


I must be crazy.  On April 16th, I posted an offer on Craigslist for a free business plan review.  I wouldn’t write it for you but give you creative criticism from the point of view of a potential investor or loan officer while also testing the feasibility of the plan.  There were NO takers.  I didn’t promote it and Northwest CT doesn’t get much traffic.

So, as part of my goal to help 1000 businesses in 2013, I’m reopening my offer to review your business plan for free.  I will sign any confidentiality agreement that you’d like.  I will review it for both feasibility – do the numbers make sense – and the likelihood of getting funding for your business.

This isn’t an offer to write a plan.  It isn’t an offer for funding.  I just want to help you be successful.  I won’t try yo sell you anything.  Email me at 2013smbizsuccess@gmail.com for more info.

 

Starting a small business Part 9


How much money do you need to start a business?

How do you make a small fortune in the restaurant business?   Start with a large fortune.  That one kills at most CPA gatherings.

Lots, to answer my first question.  When starting a business, you need to figure out what you need including capital equipment, start up costs, working capital, safety margin.

Capital equipment includes all of the tangible assets that you need – machines, furniture, computers, phone systems, copiers, resource material, and so on.  Don’t forget Leasehold Improvements if you plan to rent space.

Start up costs include things like professional fees to get your business going, building a website, branding, first round marketing and anything else to get the business off the ground.  It can also include deposits for rent, utilities, etc.

Working capital in this sense means having enough cash to pay 3 months worth of expenses without any revenue.  You’ll need to plan out monthly expenses in your business plan financials.  You should have at least three months worth of expenses in cash.  It may take a while to get customers to buy from you and pay you.  Working capital also includes opening inventory and supplies.  You can’t fix a transmission if you can’t afford the parts.

Safety margin.  Things go wrong all the time.  Survival may rely of having a few more bucks put away to handle the problems or pay for things that you didn’t originally plan.

Make a list and get prices for each.  Add it all up.  Can you find the money to pay for this?

 

Embrace the Executive Summary – The Accelerators – WSJ


Embrace the Executive Summary – The Accelerators – WSJ.

This is horrible advice for 99% of small business startups.  If you’re blessed with coding skills and an incubator, go ahead and follow this advice.  If you are starting any other kind of business, with YOUR money on the line, you need to build a budget/plan.  Check out the 3rd paragraph.  He admits his advice is for a very narrow range of businesses.  Except, skip SCORE.  These guys are retired for a reason and starting a successful business isn’t it.